Higher payroll taxes a concern for Atlantic City casinos

Analysts are warning of a setback for casino business nationwide this year because of higher payroll taxes.

With more money being taken out of their paychecks, casino customers will not have as much discretionary income for gambling trips, analysts say.

The main culprit, analysts say, is a higher payroll tax for Social Security. A 2 percent temporary cut in the Social Security tax, which was enacted two years ago to stimulate spending in the fragile economy, expired at the end of 2012 when Congress did not extend it as part of the budget negotiations.

“I think, for the most part, anything that is going to be a negative to consumers’ discretionary spending is going to be a concern for the casino industry,” Paladino said in an interview.

Paladino put out a report this month for Fitch Ratings characterizing higher payroll taxes as “another headwind for an already lackluster outlook for U.S. casino operators.”

Deutsche Bank, in a January report that also focused on the payroll tax, asked consumers, “Did you see your paycheck?”

Andrew Zarnett, a casino analyst and the author of the Deutsche Bank report, predicted higher taxes “will be a negative to the gaming industry.”

Zarnett noted there was a fundamental shift in consumer spending following the recession. He said consumers have become much more frugal and value-oriented in their discretionary spending, including their casino trips. Higher taxes simply will make them even more tight-fisted, he believes.

Paladino said it appears the higher payroll tax helped to drive down gambling revenue in January in Missouri, Indiana, Iowa and Illinois. He did not discount it as being a factor in Atlantic City’s 13 percent drop in gambling revenue in January, although casino executives blamed the decline largely on the lingering effects of Hurricane Sandy.

“There’s going to be a noticeable impact. I think it’s seen in the January numbers that came out,” Paladino said of the higher payroll tax.

Joe Lupo, senior vice president of operations at Borgata Hotel Casino & Spa, said he has not noticed any reduction in spending among Borgata’s customers that could be traced to higher taxes.

Lupo surmised that Borgata’s customers may not be as quick to cut back on their spending because they tend to be more upscale. Borgata, Atlantic City’s top-grossing casino, is a high-end, Las Vegas-style resort property.

“Here at Borgata, our clientele probably would not be as prone to be affected as much as customers in the rest of the leisure industry or at other casinos,” Lupo said.

Tony Rodio, president of the Casino Association of New Jersey, a trade group representing Atlantic City’s casinos, could not be reached for comment.

Atlantic City’s casino industry has suffered six straight years of revenue declines blamed on the sluggish economy, competition from casinos in surrounding states and, most recently, Hurricane Sandy. Now, analysts are predicting that higher taxes will deal another blow to casinos in Atlantic City and nationwide.

Paladino fears that higher taxes could offset positive economic trends in other areas, including lower consumer debt and an uptick in housing prices in some markets.

“It’s a direct negative to discretionary income,” he said.

Zarnett, citing a Tax Policy Center report, said higher payroll taxes will result in about a $1,000 decline in discretionary spending per household on an annual basis.

In addition to the higher Social Security payroll tax, Zarnett also believes higher taxes on wealthier Americans will result in cutbacks in discretionary spending. Congress has approved higher taxes on individuals with incomes of more than $400,000 and couples at $450,000 and above.

Even before higher taxes took hold, Zarnett said changing patterns in consumer spending for the casino industry were already reflected by a visitor profile study for 2007-11, completed by the Las Vegas Convention and Visitors Authority.

“For example, in 2007, the percentage of patrons who gambled while visiting Las Vegas was 84 percent. This number decreased to 77 percent in 2011. Not only did fewer patrons choose to gamble, but (among) the ones that did spend money on the casino floor, customers spent fewer hours than they did in 2007,” Zarnett wrote in his research report.

During the study period for Las Vegas visitors, the average budget of casino players decreased by nearly 20 percent, from about $555 in 2007 to about $447 in 2011, Zarnett added.

Las Vegas, Atlantic City and other casino markets are feeling the intense pressure of competition as legalized gambling expands across the country. In Atlantic City’s case, Paladino believes Internet gambling could give the market an edge over other casino states and help push revenue higher.

Gov. Chris Christie has conditionally vetoed New Jersey’s Internet gambling law, saying he wants it restricted to a 10-year trial period. The state Legislature is expected to amend the Internet gambling bill later this month to comply with the governor’s wishes. If the governor signs the Internet bill into law, people in New Jersey could use their home computers and hand-held devices to place bets on Atlantic City’s casino slot machines and table games.

“Online gaming would be an alternative revenue source for operators in Atlantic City and would put them ahead of the curve among the casino states if there is no federal (Internet gambling) legislation,” Paladino said.